Thursday, December 29, 2011

Apartment Update

Received the November report for the Houston apartment complex and it was not good. Occupancy has dropped to 89% with 26 move-outs, 12 of which were without notice. So rent concession costs increased to fill the empty units. Expenses are still going lower, which is a small positive. Some exterior wood replacement needed to be done that cost $31,000 but that was paid directly from the replacement escrow account with our lender, so it did not affect cashflow. The manager's report includes this ominous phrase: "...outstanding aged accounts payable continue to place considerable strain on property operations." Total revenue for November was $175,000 and the balance sheet shows $233,000 of Accounts Payable, so yeah, I can see that would cause a strain.

Truthfully, I am getting tired of this investment. I don't think the investors have gotten a payment in over a year. I know the problem is high unemployment and the soft economy, but it gets pretty old hearing month after month that the place is just limping along. This investment was made with an eye towards capital gains, not monthly income, so I need to keep that in mind. Still, it is somewhat frustrating to know there is little that can be done to turn things around. I guess I am still used to the rehab mindset of being able to improve a property and sell it.

I'm starting to see why my hard money lending partner likes lending so much. Rentals require dealing with tenants and repairs, etc. Investing in apartment complexes does too, although a management company keeps those factors one step removed from the investor. Hard money lending on the other hand, is relatively hassle-free, once you have a set of good, regular borrowers lined up. Lending also lets me spread out my investment over several properties, reducing the risk from any single one. I think once this apartment investment ends, I'll stick to hard money lending. You do lose out on all the nice depreciation deductions and tax-deferral options though.


Another Investor said...

You got into the wrong investment at the wrong time. The GP was overconfident, based on previous successes.

Hope this does not end up going back to the lender....

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David Abraham said...

Nice informative blog, thanks for sharing.

Jared said...

Have you thought about getting more involved in the operations yourself? An owner stepping in to handle leasing, calling delinquent tenants, etc can make a big difference.

Shaun said...

Jared - how ironic, coming from a property management firm. First, I hae no experience managing apartment complexes. We have a company that does that for us. Second, I am not the sole owner. Third, I live two states away from the property.

Don said...

I just don't trust the property management companies. I don't think they are crooks but I am worried that thier interests are not in sync with mine. (but I only do single family residence). May be bettter to have an employee but that has problems too.

When you do hard money what are you terms? How often do you end up with the property?

Last month you made some posts at my site. One was about a house that took 6 months to close. I finally closed and have posted pics. Another house had a pool with trees growing in it. You suggested filling it in which I have decided to do. This one should be finished by the end of the month.
Check it out here:

Shaun said...

Yeah, property management companies can definitely be a mixed blessing. No one will watch your money like you and I've found they tend to do stuff without regards to expense. But if you can find a good one, they can be great.

We typically loan at 12% interest only, 1 year term, at no more than 70% LTV. Never had to take back a property, which is likely due to my partner's network of borrowers. He's worked with these people for years. We did come close to having to take back a property once. Check this blog for the tags commercial #1 and Louisiana. We made a loan on two commercial buildings and two parking lots. One of the other lenders in the group bought out some others, gained a controlling share, and stopped making payments. It was looking like it was going to head to courts for a nasty legal fight, but we found someone to buy us out and we didn't lose any money. I think it helped that the group that bought us out had a bit of a personal vendetta against the guy that stopped paying and were more than happy to take him to court :-)

I have been following your blog. Congrats on finally getting the REO property!

Don said...

Sorry if you have answered this elsewhere but I could not find it.

Where do you get your comps?
You invest in many areas so it seems like finding reliable comps would be a problem.

I have an agent that can pull from the local mls but that only works for my city. I have tried realQuest but was not impressed with the data.

Shaun said...

Currently, I'm only investing through my partner in the San Francisco area. He has MLS access and has spent over a decade investing there, so he knows the area well. The commercial deal in Louisiana was based more on the potential income of the property (commercial buildings are valued on that rather than nearby sales). We also looked at the economic forecast of the area from the local government and/or chamber of commerce. When I was investing near my home in the Phoenix area, I found some local agents whose websites allowed MLS searches and used those. Also used Zillow (with some hesitation) and tax assessor's records. I hunted around for places to access the MLS for free. And also relied on my knowledge of the area. I stayed away from any deals that were just so-so. I tried to make sure that I would still make a profit even if my comps were off by $5K to $10K. If the acceptability of a deal was so dependent on the value of comps I used, I generally avoided it.

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